Seven States With No Income Tax

As the deadline for tax season approaches, the residents of seven states are going to have one less thing to worry about than the rest of the country. People who live and file taxes in these states will have to pay no state income tax, something that costs nearly $2,000 per person in New York, the state with the highest income tax rate.

While personal income tax is usually the largest source of tax-based revenue for states, there are other sources of revenue. Some of the states without income tax make up for the revenue they are missing through sales and corporate taxes. Other states simply spend less on services to keep a balanced budget. Using recently released tax collection numbers for 2011 from the Tax Foundation, 24/7 Wall St. reviewed the seven states where residents do not pay income tax.

In several of these states, the lower revenue from income tax is made up for in other ways. Alaska and Wyoming, neither of which charge a personal income tax, actually had the first- and third-highest tax revenue per capita, respectively, in 2011.

In the case of Alaska, this is in large part due to the corporate income taxes it raises from the natural resources sector. The state collected more than $1,000 in corporate taxes per capita in 2011. No other state collected more than $450, and the average state collected just $129. In the case of Wyoming, the state collects the third-highest revenue per capita from sales tax.

Other states, however, are not offsetting the lower revenue from a lack of income tax with other taxes. Florida, Nevada and Texas are all among the bottom five states for revenue per capita. Because of their below-average revenue, spending in these states is particularly low. In 2011, state spending per capita was the fourth lowest in the country in Nevada, fifth lowest in Texas and the lowest in Florida — $4,441, compared to a national average of $6,427 per capita.

In the states with no income tax to maintain solid revenue, like Alaska and Wyoming, spending is — not surprisingly — quite high. Wyoming spent $9,986 per capita in 2011, the second highest in the country. Alaska spent $15,663, by far the most of any state.

Joseph Henchman, Vice President of Legal and State Projects at the Tax Foundation, explained that the trend of low revenue states spending less is not a product of a deliberate choice by these states to operate under a conservative budget. In states like Texas, Florida and Nevada, Henchman said in an interview with 24/7 Wall St., “The decision to have a frugal government probably came before the decision to have a lower tax system.” Unlike Alaska and Wyoming, these states have chosen to spend little per capita, and so tax less as a result.

To find the seven states that do not tax income, 24/7 Wall St. studied data provided by the Tax Foundation. These states do not tax wages earned by individuals, nor do they tax interest and dividend payments. Tax rates are the most recently available, and were provided by the Tax Foundation from itsFacts & Figures Handbook for 2013. Tax collection figures are from 2011, as are effective property tax rates. Figures on state expenditure are from the U.S. Census Bureau’s State Government Finances Summary: 2011.